Focus on drones in Ambarella results after steep stock fall

SAN FRANCISCO (Reuters) - Drones and GoPro will be in the spotlight on Thursday when Ambarella posts its latest quarterly results after a recent selloff that has left the video chipmaker's once-stratospheric stock low enough to catch the eye of potential suitors.

Ambarella became an investor favorite last year thanks to stellar growth of top customer GoPro. However, its reliance on the maker of sports cameras is increasingly seen as a liability.

Still, the video processor specialist remains one of the fastest-expanding chipmakers in an industry caught in a wave of M&A as larger, sluggish players struggle to expand.

After hitting a record high in July, its stock has slumped 50 percent due to worries about slower growth at GoPro. That has pulled Ambarella's valuation down from as high as 50 times expected earnings, to 17, according to Thomson Reuters data. That is below larger players Nvidia, at 25, and Texas Instruments, recently at 19.

"Now that it has pulled back and you could justify it as being closer to an industry multiple, I think the potential for an acquisition increases," said Needham analyst Quinn Bolton. "It's got one of the best technical teams in the Valley so I have to think there are larger companies who might love to bring that technical ability in."

Bolton said he has no knowledge of any potential acquisition of Ambarella and he rates the stock "hold," in part because of a warning by GoPro about demand for its newest cameras.

Ambarella was down 0.13 percent at $60.38 on Thursday.

When Ambarella posts its fiscal third-quarter results after the bell, investors will focus on its progress diversifying revenue.

Selling chips to drone makers is a smaller but growing business that has also attracted the attention of Wall Street.

For the third quarter, analysts on average expect revenue of $90 million and EPS of 86 cents, according to Thomson Reuters data.

Jitters about GoPro have made Ambarella a target for short sellers, setting the stage for a potential squeeze if the stock rebounds. Almost 42 percent of its outstanding shares were sold short in mid-November, up from 29 percent in August, according to Thomson Reuters.

"When those shorts start to buy, whenever that is, it's a lot of stock that's got to be bought to cover," Bolton said.